Stock markets in rally mode despite worries
Is it a breakout or a fake out? Only time will tell, of course. But for the moment, investors are enjoying the ride.
Stock markets posted tripledigit gains Wednesday, led by surging energy and materials stocks, as Toronto’s main equity index closed above the 14,000 mark for the first time since August.
The 100-point rally left Toronto’s bellwether S&P/TSX Composite Index at 14,053. That’s more than 18 per cent above the 2016 lows set back in January, when it looked like the seven-year-old bull market was set to expire.
It was a similar story south of the border, where all three major indexes notched healthy gains. The Dow Jones Industrial Average jumped 145 points to 17,851; the S&P 500 Index advanced 14.5 points to 2,090; and the techladen Nasdaq Composite Index jumped 33 points to 4,894.
Wednesday’s surge, which left the S&P 500 just two per cent shy of its all-time record high, defied a rather lofty wall of worries.
The list of current negatives includes sagging corporate profits, the wackiest U.S. presidential election year in memory, a pending vote in Britain over continued membership in the European Union, and growing talk that the U.S. Federal Reserve Board is set to hike interest rates for the second time in six months.
Investors also shrugged off a statement from Bank of Canada Gov. Stephen Poloz that the disastrous Fort McMurray wildfires — which have temporarily shut down more than a million barrels a day of oilsands output — wiped out the meagre one-percent economic growth the BOC had projected for the current quarter.
Poloz now sees the Canadian economy contracting in the second quarter.
As usual, the basis for Wednesday’s rally was another sharp jump in crude oil prices, which have climbed sharply since hitting a 12-year low of just over US$26 a barrel in February.
The July futures contract for West Texas Intermediate (WTI) crude, the benchmark grade of U.S. light crude, closed at US$49.56 a barrel, up 94 cents on the day. It now looks like a cinch to hit the $50 mark, something few would have predicted a couple of months ago.
That in turn drove Toronto’s S&P/TSX Capped Energy Index ahead by 2.1 per cent, tops among the TSX’s 10 sectors. Materials stocks also had another strong day, gaining 1.8 per cent.
Since Toronto’s resource-heavy market bottomed out in January, energy stocks have gained 40 per cent and materials stocks are up by 45 per cent. The long list of winners Wednesday included shares of oilpatch players like Bonavista, Baytex, Crew Energy, Enerplus, Gran Tierra, Nu Vista and Vermillion.
A series of supply-side disruptions — including the fires around Fort McMurray, the steady decline in U.S. production to less than 8.8 million barrels per day (b/d), and terrorist attacks in Nigeria that have cut its 2016 production by some 800,000 b/d — have helped to shrink the global supply glut faster than expected.
Although U.S. inventories remain at near-record high levels, they are starting to drop along with U.S. output, which peaked at 9.7 million b/d last year. The U.S. Energy Information Administration reported Wednesday that stockpiles slid by 4.2 million barrels during the latest weekly period, more than twice what was expected.
The result has been a significant improvement in investor sentiment. Wall Street giant Citigroup hiked its oil price forecasts earlier this week. It’s now calling for WTI to hit $50 by the fourth quarter — a target that looks conservative, given the current rally — and $61 by the end of 2017.
National Bank Financial sees further upside ahead for equity markets. In a commentary issued Wednesday, Stefane Marion, the bank’s chief economist and strategist, and Matthieu Arseneau, a senior economist, said they don’t expect a “Brexit” vote in Britain, or an imminent Fed rate hike.
They also point to signs of stronger corporate earnings ahead in the U.S. As a result, they have a current target of 14,700 for the S&P/TSX Composite Index and a target of 2,200 for the S&P 500 Index by early 2017.
Some aren’t convinced that the current rally has legs, however.
“Some investors and pundits are commemorating the oneyear anniversary of the May 2015 record high in U.S. stocks by noting that the market is only a couple per cent below it,” says Dow Jones Market-Watch columnist Mark Hulburt.
“Their implication is that the bull market is still alive, if not exactly well. But they are finding it increasingly difficult to adhere to this belief. Within one week, they will find it nearly impossible to do so,” he adds.
“That’s because there’s been only one bull market since 1900 that experienced a correction that lasted longer than a year” — the length of the current pullback — “so unless the stock market this week surges to new all-time highs, those in the (bullish) camp will have to argue that the current (market) is different than any other over the past 120 years.”
We’ll know the answer to that riddle soon enough.